Renewable energy advocates have been calling for a change in the tax laws to allow renewable energy within the REIT structure. A REIT is allowed to pass profits directly through to investors. These profits are not subject to double-taxation like most corporate profits. Owning shares of a renewable REIT would be much like owning a slice of a wind or solar farm. This would open up the renewable energy investment opportunity to everyone, not just corporations and homeowners with with a roof suitable for solar.

The catch is that REITs are limited to certain types of real estate based assets, and without a new ruling from the IRS, wind and solar farms are out. Which is why renewable advocates have been calling for just such a ruling.

Power REIT CEO David Lesser has beaten them to the punch.

Lesser was an investment banker at Merrill Lynch, where he helped create a large number of REITs to provide more equity to over-indebted real estate property. That experience allowed him to see what the renewable advocates did not: there is a place in the existing REIT structure for renewable energy. It's possible to strip out the real estate assets from a wind or solar farm, and put them into the REIT. Renewable energy developers are already familiar with complex ownership structures (thanks to our tax laws), so stripping out real estate assets should not be a big leap.

Power REIT

In order to implement his vision, Lesser and his team began buying the shares of what was then known as the Pittsburgh & West Virginia Railroad, an infrastructure REIT holding 112 miles of main line railroad real estate that is triple-net leased to Norfolk Southern Railroad (NYSE:NSC) for 99 years. The renamed PW still holds the railroad asset, and has no debt.

Based on the income from the railroad lease, PW pays a $0.40 annual dividend, for a 5.5% yield at the current stock price of $7.24. Lesser believes he can invest in renewable energy assets at yields in the 8.5% to 9% range. These will be financed with debt at around 6.5% and potentially additional equity. Any such transaction would bring an immediate increase in income per share.

Acquisitions have an added advantage of increased scale. Power REIT needs to grow in order to better manage the expenses of being public. Income from the existing railroad asset is insufficient to support these expenses.

One other potential upside lies in the railroad asset itself. PW has initiated litigation with Norfolk Southern, which management believes has failed to pay all its contractual obligations under the lease. The risks involved in this suit are limited to litigation costs, while the potential gains could be quite large for the microcap REIT.